NRG Energy is Transforming Into a Clean Energy Force

Some companies talk about shifting their business model, but it's often harder said than done. NRG Energy (NYSE: NRG) has talked for years about investing in renewable energy, and now we're starting to see some of the fruits of that labor.

Strategic acquisitions have played a key role in the company's transformation into a renewable energy company with NRG Yield (NYSE: NYLD) Now NRG Eenrgy can now push renewable assets down to a subsidiary with a lower cost of capital, fueling future growth.

Huge solar projects like the California Valley Solar Ranch have made NRG Energy a power in renewable energy. Image courtesy of SunPower.

Buying into the solar business NRG Energy spent most of the last five years buying up major solar projects, among many other smaller projects. It bought SunPower's (NASDAQ: SPWR) 250-megawatt California Valley Solar Ranch, along with the 392 MW Ivanpah solar thermal plant, and co-owns First Solar's (NASDAQ: FSLR) 290 MW Agua Caliente Solar Project in Arizona with MidAmerican Energy.

Recently the company has become a solar developer, highlighted by the acquisition of Roof DiagnosticsSolar, a builder of rooftop solar systems. This puts NRG Energy in direct competition with SolarCity (NASDAQ: SCTY) and SunPower in the residential market and is one of the first cases of a utility buying a solar installer. The impact on the industry shouldn't be understated.

The resulting impact is an increasingly green portfolio that is quickly developing at NRG Energy. In the fourth quarter of 2013, 6% of its production was from renewable energy, and production capacity more than doubled throughout the year from 340 MW to 800 MW. This year, the company passed 1,200 MW before the end of the first quarter.

Solar communities will be more common in the future, and NRG is developing a solution for them with the micro-grid. Image courtesy of SolarCity.

The impact of regulation on utilities NRG Energy is one of the best examples of what happens to a utility when it isn't protected by a monopoly. NRG's main business was selling power to other utilities; when that business came under fire from low-cost natural gas, renewable energy, and lower consumption, margins fell and NRG Energy had to find a way to grow. Renewable energy was the natural answer, and the company has been finding new ways to profit from wind and solar.

That hasn't been the case for many other utilities around the country. Pinnacle West's (NYSE: PNW) Arizona Public Service has been one of the most vocal renewable energy detractors, claiming that rooftop solar will raise the cost of electricity for everyone else. Duke Energy, Hawaiian Electric, Rocky Mountain Power, and many other utilities are also fighting solar because it upsets the status quo in energy.

What makes NRG Energy interesting as an investment is that it's embracing new energy and finding ways to profit from it, rather than fighting the change.

What's next? NRG's renewable energy plans are far from over. It will push more assets down to NRG Yield in the future and its growth plans include micro grid and energy storage. The first example of these plans will be on Richard Branson's Necker Island, which recently hired NRG Energy to build a renewable energy-driven micro grid for the island.

Should you buy now? NRG Energy has been up and down in recent years, but in 2013 cash flow before growth initiatives was an impressive $1.28 billion. Guidance for 2014 puts the same cash flow measure at somewhere between $950 million and $1.15 billion, but keep in mind that NRG still has $16.8 billion in long-term debt.

The better option may be NRG Yield, which is matching renewable energy assets with cash-generating traditional energy assets. As those renewable assets generate income, more new renewable generation will be pushed down to the company to take advantage of tax equity financing rules. The result is a growing company and a nice 3.4% yield that should increase consistently over time.

Renewable energy projects are normally backed with guaranteed cash flows for 20 years, unlike power plants selling into the spot market, so it's an attractive investment financially. That's where my money would be in NRG's newly transformed business.

3 stock picks to ride America's energy bonanzaRecord oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

Travis Hoium manages an account that owns shares of NRG YIELD INC and SunPower. He personally owns shares of SunPower and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Still kicking myself for selling NRG Energy about a year and a half ago.

The first article I ever wrote for the Motley Fool Blog Network was about NRG Energy's eVgo. I was even the CAPS score leader for NRG until I ended it. My CAPS pick and real-life position were up about 42% verses 9% for the S&P 500 at the time. A 42% gain for a utility in just over 4 months. If I had held on to my shares though, I'd be looking at a 104% return right now (not including reinvested dividends).

Live and learn. I've reinvested that money in other winners since then (and a few losers as well), but still... *kicks self*

Not making that same mistake again with SolarCity. I've committed myself to hold SCTY for the long term (5 years kind of long term). And if shares of NRG Energy were to ever slip, I still have that on my watchlist as well.